MsourcE (India) Private Limited, Bangalore V. ACIT, Bangalore

CO 18/BANG/2011

• Counselvise Citation: [2011] 122 COUNSELVISE.COM (IT) 6549 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 24 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 17-10-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 24-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 143(3); 10B

Judgement Text

PAGE 1 OF 8 ITA NO.118/BANG/2011 & C.O.NO.18/BANG/2011 1 INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES B BEFORE SHRI N K SAINI, ACCOUNANT MEMBER AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.118/BANG/2011 (ASST. YEAR 2005-06) THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12(1), BANGALORE. - APPELLANT VS M/S MSOURCE INDIA PVT. LTD., BAGMANE TECHNOLOGY PARK, BYRASANDRA, C V RAMAN NAGAR, BANGALORE-93. - RESPONDENT PA NO.AACCM2097G C.O.NO.18/BANG/2011 (ASST. YEAR 2005-06) (BY ASSESSEE) DATE OF HEARING : 17/10/2011 DATE OF PRONOUNCEMENT : 17/10/2011 APPELLANT BY : SMT. PREETHI GARG, CIT RESPONDENT BY : SHRI AJAY ROTTI, C.A. O R D E R PER GEORGE GEORGE K : THIS APPEAL INSTITUTED BY THE DEPARTMENT AND THE C ROSS OBJECTION FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF THE CIT(A)-III, BANGALORE DATED 19/10/2010.. THE RELEV ANT ASST. YEAR IS 2005-06. PAGE 2 OF 8 ITA NO.118/BANG/2011 & C.O.NO.18/BANG/2011 2 2. IN THE APPEAL, THE EFFECTIVE GROUND RAISED BY TH E REVENUE READS AS FOLLOWS:- THE LEARNED CIT(A) HAS ERRED IN DIRECTING ASSESSING OFFICER TO EXCLUDE FOREIGN CURRENCY EXPENSES OF RS.2,25,92,593/- ATTRIBUTABLE TO DELIVERY OF SOFTWAR E AND TELECOMMUNICATION EXPENSES OF RS.12,48,23,926/- FROM TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 10A OF THE I T ACT, 1961. 3. IN THE CROSS OBJECTION, THE EFFECTIVE GROUND RA ISED BY THE ASSESSEE READS AS FOLLOWS:- ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEA RNED CIT(A) ERRED IN NOT ADJUDICATING THE GROUND REGARDI NG NON-EXCLUSION OF EXPENSES INCURRED IN FOREIGN CURRE NCY OF RS.2,25,92,593/- FROM THE EXPORT TURNOVER WITHOUT APPRECIATING THE FACT THAT THE COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING BUSINESS PROCESS OUTSOURCING SERVICES AND NOT TECHNICAL SERVICES. 4. BRIEFLY STATED THE FACTS ARE AS FOLLOWS:- THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. FOR THE CONCERNED ASST. YEAR, RETURN OF INCOME WAS FILED ON 29 TH OCTOBER, 2005 DECLARING A TOTAL INCOME OF RS.59,62 ,426/- AFTER CLAIMING DEDUCTION U/S 10A OF THE ACT. SCRUTINY ASSE SSMENT WAS COMPLETED U/S 143(3) OF THE ACT VIDE ORDER DATED 16/12/2008. THE AO RECOMPUTED THE DEDUCTION ALLOWABLE U/S 10A OF THE ACT. THE AO REDUCED THE FOLLOWING EXPENSES FROM THE EXPORT TURNOVER BUT NOT FROM THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT:- A) THE EXPENSES INCURRED ON TELECOMMUNICATION AND B) THE EXPENSES INCURRED IN FOREIGN CURRENCY. PAGE 3 OF 8 ITA NO.118/BANG/2011 & C.O.NO.18/BANG/2011 3 AS A RESULT OF THE RE-COMPUTATION, THE ASSESSEES C LAIM OF DEDUCTION U/S 10A AMOUNTING TO RS.38,17,73,086/- WAS REDUCED TO RS.35 ,53,02,449/- THEREBY RESULTING IN ADDITION OF THE EXCESS CLAIM OF RS.2,6 4,70,637/-. 5. AGGRIEVED BY THE RE-COMPUTATION OF DEDUCTION, TH E ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APPEL LATE AUTHORITY. 6. BEFORE THE FIRST APPELLATE AUTHORITY IT WAS ARGU ED THAT IT IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE AND ACCORDINGLY, IN CERTAIN CASES, THE ASSESSEES PERSONNEL WERE REQUIR ED TO VISIT THE SITE OF THE CUSTOMERS, WHICH IS PURELY INCIDENTAL TO THE SOFTWAR E DEVELOPMENT PROJECTS UNDERTAKEN BY THE ASSESSEE. IT WAS SUBMITTED THAT THE ASSESSEE IS NOT INVOLVED IN RENDERING ANY MANAGERIAL, TECHNICAL OR C ONSULTANCY SERVICES SO AS TO FALL WITHIN THE PURVIEW OF THE DEFINITION OF FE ES FOR TECHNICAL SERVICES AND THEREFORE, THE EXPENDITURE INCURRED IN FOREIGN CURRENCY CANNOT BE REDUCED FROM THE GROSS EXPORT TURNOVER OF COMPUTER SOFTWARE FOR THE PURPOSE OF COMPUTING THE EXPORT TURNOVER. THE ASSE SSEE HAS RELIED ON THE FOLLOWING JUDICIAL PRECEDENTS, WHICH HAVE HELD THAT WHERE A PERSON IS INVOLVED IN COMPUTER PROGRAMME CREATION, HE SHOULD BE REGARDED AS BEING ENGAGED IN THE DEVELOPMENT OF COMPUTER SOFTWARE SO AS TO FALL WITHIN THE SECTION 80HHE(1)(I) OF THE ACT AND SUCH A PERSON SH OULD NOT BE HELD TO BE ENGAGED IN THE BUSINESS OF RENDERING TECHNICAL SERV ICES COVERED BY SECTION 80HHE(1)(II) OF THE ACT. INFOSYS TECHNOLOGIES LIMITED (ITA NO. 793 TO 795, 7 42 AND 732- 734/BANG/2001) MPHASIS LTD. (ITA NO.884/BANG/2007 FOR THE AY 2003- 04 AND ITA NO.524/BANG/2008 FOR THE AY 2004-05) PAGE 4 OF 8 ITA NO.118/BANG/2011 & C.O.NO.18/BANG/2011 4 ALTERNATIVELY IT WAS URGED THAT IF THE EXPENSES IN Q UESTION ARE SO EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE R EDUCED FROM THE TOTAL TURNOVER WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. IN THIS REGARD, THE ASSESSEE RELIED ON THE FOLLOWING DECISIONS:- GEM PLUS JEWELLERY INDIA LTD. (2010) (233 CTR 248) (BOM.); M/S SAK SOFT LTD. (2009) (313 ITR 353) (SB). 7. THE FIRST APPELLATE AUTHORITY ACCEPTED THE ALTER NATIVE CONTENTION OF THE ASSESSEE AND BY FOLLOWING THE JUDG EMENT OF THE HONBLE MUMBAI HIGH COURT IN THE CASE OF CIT V GEM PLUS JEW ELLERY INDIA LTD. 330 ITR 175 AND THE DECISION OF THE SPECIAL BENCH IN TH E CASE OF ITO V M/S SAK SOFT LTD. 313 ITR 353, DIRECTED THE AO TO EXCLUDE T HE ABOVE SAID EXPENSES FROM BOTH THE EXPORT TURNOVER AND THE TOTAL TURNOVE R FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 10A OF THE ACT. 8. AGGRIEVED BY THE ORDER OF THE CIT(A), THE DEPART MENT IS IN APPEAL BEFORE US AND THE ASSESSEE, BEING AGGRIEVED BY THE NON-ADJUDICATION OF THE GROUND, THAT THE ABOVE SAID EXPENSES SHOULD NOT BE REDUCED FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S 10A O F THE ACT, HAS FILED THE CROSS OBJECTION BEFORE US. 9. THE LEARNED DR RELIED ON THE FINDINGS OF THE AO . 10. ON THE OTHER HAND, THE LEARNED AR SUBMITTED TH AT THE ISSUE IN QUESTION IS SQUARELY COVERED BY THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY INDIA LTD. 330 ITR 175 AND THE ORDER OF THE SPECIAL BENCH IN THE CASE OF ITO V M/S SAK SOFT LTD. 313 ITR 353. PAGE 5 OF 8 ITA NO.118/BANG/2011 & C.O.NO.18/BANG/2011 5 11. WE HAVE HEARD THE LEARNED DR AND PERUSED THE MATERI AL ON RECORD. THE HONBLE MUMBAI HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY INDIA LTD. (SUPRA), IN IDENTICAL CIRCUMSTANCES, HEL D THAT SINCE THE EXPORT TURNOVER FORMS PART OF THE TOTAL TURNOVER, IF AN IT EM IS EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE REDUCED FR OM THE TOTAL TURNOVER TO MAINTAIN PARITY BETWEEN NUMERATOR AND DENOMINATOR WH ILE CALCULATING DEDUCTION U/S 10A OF THE ACT. THE RELEVANT FINDING OF THE HONBLE MUMBAI HIGH COURT READS AS FOLLOWS:- HELD : THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPO RT AND THE TURNOVER FROM LOCAL SALES. THE EXPORT TURNOVER CONSTITUTES THE NUMERATOR IN THE FORMULA PRESCRIBED BY SUB-SECTION (4). EXPORT TURNOVER ALSO FORMS A CONS TITUENT ELEMENT OF THE DENOMINATOR IN AS MUCH AS THE EXPORT TURNOVER IS A PART OF THE TOTAL TURNOVER. THE EXPO RT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAME MEANI NG AS THE EXPORT TURNOVER WHICH IS CONSTITUENT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PROVIDED A DEFINITION OF THE EXPRESSION EXPORT TUR NOVER IN EXPLN.2 TO S.10A WHICH THE EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERT AKING OF ARTICLES, THINGS OR COMPUTER SOFTWARE RECEIVED I N OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FO REIGN EXCHANGE BUT SO AS NOT TO INCLUDE INTER ALIA FREIGH T, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES, THINGS OR SOFTWARE OUTSIDE INDIA. THEREFORE IN COMPUTING THE EXPORT TURNOVER THE LEGI SLATURE HAS MADE A SPECIFIC EXCLUSION OF FREIGHT AND INSURA NCE CHARGES. THE SUBMISSION WHICH HAS BEEN URGED ON BE HALF OF THE REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHA RGES ARE LIABLE TO BE EXCLUDED IN COMPUTING EXPORT TURNOVER, A SIMILAR EXCLUSION HAS NOT BEEN PROVIDED IN REGARD TO TOTAL TURNOVER. THE SUBMISSION OF THE REVENUE, HOWEVER, MISSES THE POINT PAGE 6 OF 8 ITA NO.118/BANG/2011 & C.O.NO.18/BANG/2011 6 THAT THE EXPRESSION TOTAL TURNOVER HAS NOT BEEN D EFINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF S.10A. HOW EVER, THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE DEFINITION OF EXPORT TURNOVER EXCLUDES FREIGHT AN D INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BY PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FRE IGHT AND INSURANCE, THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PROVISION WHICH HAS BEEN ENUNCIATED EARLIER MUST PR EVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OT HER INTERPRETATION WOULD LEAD TO AN ABSURDITY. IF THE C ONTENTION OF THE REVENUE WERE TO BE ACCEPTED, THE SAME EXPRES SION VIZ. EXPORT TURNOVER WOULD HAVE A DIFFERENT CONNO TATION IN THE APPLICATION OF THE SAME FORMULA. THE SUBMISSIO N OF THE REVENUE WOULD LEAD TO A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH THESE HAVE BEEN SPECIFICALLY EXCLU DED FROM EXPORT TURNOVER FOR THE PURPOSES OF THE NUME RATOR WOULD BE BROUGHT IN AS PART OF THE EXPORT TURNOVER WHEN IT FORMS AN ELEMENT OF THE TOTAL TURNOVER AS A DENOMIN ATOR IN THE FORMULA. A CONSTRUCTION OF A STATUTORY PROVISIO N WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. MOREOVE R, A RECEIPT SUCH AS FREIGHT AND INSURANCE WHICH DOES NO T HAVE ANY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTA L TURNOVER. FREIGHT AND INSURANCE CHARGES DO NOT HAV E ANY ELEMENT OF TURNOVER. FOR THIS REASON IN ADDITION, THESE TWO ITEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURN OVER PARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRI PTION TO THE CONTRARY CIT V SUDARSHAN CHEMICALS INDUSTRIES LTD. (2000) 163 CTR (BOM) 596: (2000) 245 ITR 769 (BOM) APPLIED; CIT V LAKSHMI MACHINE WORKS (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) AND CIT V CATAPHARMA (IN DIA) (P) LTD. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) RELIED ON 11.1 IN THE CASE OF SAK SOFT LTD. (SUPRA), THE ASS ESSEE WAS ENGAGED IN THE BUSINESS OF EXPORTING COMPUTER SOFTWARE AND CLAIMED DEDUCTION U/S PAGE 7 OF 8 ITA NO.118/BANG/2011 & C.O.NO.18/BANG/2011 7 10B OF THE ACT. IN COMPLETING THE ASSESSMENT U/S 1 43(3) OF THE ACT, THE AO REDUCED THE EXPENDITURE INCURRED IN FOREIGN EXCH ANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA, FROM THE EXPORT T URNOVER WITHOUT CORRESPONDING REDUCTION FROM TOTAL TURNOVER, THEREB Y REDUCING THE DEDUCTION CLAIMED BY THE ASSESSMENT U/S 10B OF THE A CT. 11.2 IN LIGHT OF THE ABOVE FACTS, THE SPECIAL BENC H HELD AS UNDER:- FOR THE ABOVE REASONS, WE HOLD THAT FOR THE PURPOS E OF APPLYING THE FORMULA UNDER SUB-SECTION (4) OF SECTIO N 10B, THE FREIGHT, TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS O R COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHN ICAL SERVICES OUTSIDE INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND FROM THE TOTAL TURNOVER, WHICH ARE THE NUMERATOR AND THE DENOMINATOR RESPECTIVELY IN TH E FORMULA. THE APPEALS FILED BY THE DEPARTMENT ARE TH US DISMISSED. ALTHOUGH THE ORDER OF SPECIAL BENCH IS IN THE CONTE XT OF SECTION 10B OF THE ACT, THE RATIO LAID DOWN IN THE ABOVE DECISION APPL IES TO SECTION 10A OF THE ACT AS WELL, AS THE PROVISIONS OF SECTIONS 10A AND 10B ARE IDENTICAL ON ALL MATERIAL ASPECTS. MORE PARTICULARLY, BOTH THE SECTI ONS DEFINE ONLY EXPORT TURNOVER BUT NOT TOTAL TURNOVER AND SUB-SECTION (4) OF BOTH THE SECTIONS PRESCRIBE AN IDENTICAL FORMULA FOR COMPUTING THE EX PORT PROFITS. 11.3 IN THE LIGHT OF THE ABOVE REASONING, WE UPHOL D THE ORDER OF THE CIT(A) AND DIRECT THE AO TO EXCLUDE THE ABOVE MENTI ONED EXPENSES BOTH PAGE 8 OF 8 ITA NO.118/BANG/2011 & C.O.NO.18/BANG/2011 8 FROM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. 12. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 13. IN SO FAR AS THE CROSS OBJECTION IS CONCERNED, WE FIND THAT THE MAIN GROUND REGARDING THE ABOVE SAID EXPENSES OUGHT NOT TO BE REDUCED FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT, HAS NOT BEEN ADJUDICATED BY THE CIT(A). HENCE, THI S ISSUE IS RESTORED TO THE FILE OF THE CIT(A), WHO SHALL CONSIDER THE SAME AS EXPEDITIOUSLY AS POSSIBLE AFTER AFFORDING REASONABLE OPPORTUNITY OF H EARING THE ASSESSEE AND PASS APPROPRIATE ORDER, IN ACCORDANCE WITH LAW. 13.1 IN THE RESULT, THE CROSS OBJECTION FILED BY TH E ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH DAY OF OCTOBER, 2011 SD/- SD/- (N K SAINI) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER COPY TO:- 1.THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCE RNED 4. THE CIT(A) CONCERNED 5. THE DR 6. GF MSP/- BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.